Seligman Quality Municipal Fund, Inc.
MANAGED BY
J&WS
J. & W. SELIGMAN & CO.
INCORPORATED
Investment Managers and Advisors
ESTABLISHED 1864
100 PARK AVENUE, NEW YORK, NY 10017
CESQF3a 1/98
SELIGMAN
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QUALITY
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MUNICIPAL
FUND, INC.
[PHOTO]
J&WS
FIRST QUARTER REPORT
JANUARY 31, 1998
<PAGE>
To the Stockholders
Seligman Quality Municipal Fund posted strong investment results in its first
fiscal quarter ended January 31, 1998. Even as the rate of economic growth
accelerated in the fourth calendar quarter of 1997, inflation remained
surprisingly low, supporting the lasting rally in the municipal bond market. As
a result, the Fund's overall investment results improved as yields declined
further and bond prices appreciated.
The municipal bond market rally was maintained in the last three months
because of the positive domestic environment, including low inflation, a reduced
federal budget deficit, and improved municipal tax receipts. The optimism of
market participants was further supported by the Federal Reserve Board's
decision to leave interest rates unchanged. The yield on the Bond Buyer 20-Bond
General Obligation Index, a benchmark for the municipal bond market, continued
its decline in the quarter, falling to 5.11% on January 31, 1998 -- lower than
its 5.35% yield on October 31, 1997.
Although the economy has continued to grow, it has become difficult to
forecast whether the robust pace can be sustained due to the Asian financial
crisis. While producer and consumer prices currently reflect the beneficial
aspects of increased productivity and global competition, employers still face a
historically tight labor market and rising wages. Overall, we expect a slight
reduction in the rate of economic growth in 1998. However, the sum of the
effects of the Asian crisis on the US economy remains unclear at this time.
Going forward, we anticipate that the equity markets will remain volatile,
which could make the municipal bond market's relative stability particularly
attractive to concerned investors. Additionally, municipal securities continue
to offer a significant yield advantage when compared to the after-tax returns of
other fixed-income investments.
As mentioned in the 1997 Annual Report, the Fund's Board of Directors
approved a reduction in the monthly dividend paid to Common Stockholders from
$0.0782 per share to $0.0750 per share effective in January 1998.
The principal reason for this decision was the continued narrow spread
between the Fund's earnings from its investment portfolio and the dividend rate
paid on its preferred stock. Based on current market conditions, a portion of
future dividends paid to Common Stockholders will continue to be taxable as
ordinary income. The Portfolio Manager's interview on page 2 contains further
discussion regarding investment strategies that seek to maintain the Fund's
current dividend yield.
We thank you for your continued interest in Seligman Quality Municipal Fund,
and look forward to serving your investment needs in the many years to come. A
discussion with your Portfolio Manager and the Fund's portfolio of investments
follow this letter. The Fund's investment results appear on page 4.
By order of the Board of Directors,
/s/ William C. Morris
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William C. Morris
Chairman
/s/Thomas G. Moles
------------------
Thomas G. Moles
President
February 27, 1998
1
<PAGE>
[PHOTO]
Seligman Municipals Team: (from left) Audrey Kuchtyak, Theresa Barion, Debra
McGuinness, (seated) Eileen Comerford, Thomas G. Moles (Portfolio Manager)
INTERVIEW WITH YOUR PORTFOLIO MANAGER
WHICH ECONOMIC AND MARKET FACTORS INFLUENCED SELIGMAN QUALITY MUNICIPAL FUND'S
INVESTMENT RESULTS DURING ITS FIRST FISCAL QUARTER?
"The stronger-than-expected increase in the Gross Domestic Product in the
fourth quarter of 1997 was largely discounted by the municipal market,
particularly due to extremely favorable inflation data. For the calendar year,
the Consumer Price Index rose only 1.7%, the lowest increase seen in over a
decade. This favorable economic news prompted long-term municipal yields to
continue their downward trend for the three months ended January 31, 1998,
contributing to the Fund's positive investment results in its first fiscal
quarter.
"Further, at the beginning of the Fund's second fiscal quarter, the Federal
Reserve Board voted to leave monetary policy unchanged once again. While the Fed
remains concerned about the economy's robust pace, uncertainty as to the impact
of the Asian financial crisis on our economy has induced the Fed to adopt a
neutral policy stance."
WHAT WAS YOUR INVESTMENT STRATEGY?
"Throughout this period of declining interest rates, we have endeavored to
strike a balance between positioning the Fund to participate in the municipal
market rally and minimizing the impact of the market's lower yields on the
Fund's dividend distributions. By maintaining Seligman Quality Municipal Fund's
portfolio of long-term municipal bonds, the Fund was well positioned to benefit
from the falling yields. In general, the prices of longer-term bonds are more
sensitive to changes in interest rates and will appreciate more than
shorter-term bonds when yields decline. However, in an effort to lessen the
effect of lower yields on the Fund's dividend distributions, we did forgo some
capital appreciation potential by retaining most of the Fund's higher coupon
bonds. Usually, the higher the coupon of a bond, the less it will increase in
price as yields decline. (The coupon is the interest rate the issuer pays as a
percentage of the bond's face value.)
"As Seligman Quality Municipal Fund's portfolio matures, older holdings have
been approaching their optional call dates. (A callable bond is a bond which the
issuer is permitted to redeem, prior to maturity, on specified dates and at
predetermined prices.) Lower interest rates have increased the likelihood that
municipal issuers will redeem outstanding higher-coupon bonds. In order to
extend the duration of the Fund's attractive dividend, we have been selling
shorter-call bonds and replacing them with longer-call bonds, locking in current
yield levels before they decline further.
"The Municipals Team continually seeks opportunities to improve the Fund's
investment results. Through in-depth credit and market research, we are able to
identify and profit from aberrations and inefficiencies in the municipal
market."
2
<PAGE>
INTERVIEW WITH YOUR PORTFOLIO MANAGER (CONTINUED)
WHAT IS THE OUTLOOK?
"Looking forward, we anticipate a continuation of the positive economic and
market trends that characterized 1997. We expect the improving financial
condition of the nation's states and municipalities to result in additional
credit rating upgrades in the months ahead. The stable low-inflation environment
should keep municipal yields trading in a narrow range in 1998, and prevent a
significant imbalance in supply and demand from occurring.
"Overall, municipal securities continue to offer a significant yield
advantage relative to the after-tax returns of other fixed-income investments.
We are therefore confident that Seligman Quality Municipal Fund will continue to
play an important role in helping investors seek to meet their long-term
financial goals."
3
<PAGE>
INVESTMENT RESULTS PER COMMONSHARE
TOTAL RETURNS*
FOR PERIODS ENDED JANUARY 31, 1998
Average Annual
---------------------------------
Since
Three One Five Inception
Months** Year Years 11/29/91
------- ------ ----- --------
Market Price 8.02% 18.24% 9.60% 8.43%
Net Asset Value 3.69 11.83 8.91 9.25
PRICE PER SHARE
January 31, October 31,
1998 1997
------------ ------------
Market Price $15.6875 $15.00
Net Asset Value 15.41 15.35
DIVIDEND AND CAPITAL GAIN INFORMATION
FOR THE THREE MONTHS ENDED JANUARY 31, 1998
Capital Gain
----------------------------------
Dividends Paid+ Paid Realized Unrealized
-------------- ------- -------- ----------
$0.2314 $0.269 -- $1.959++
ANNUAL DISTRIBUTION RATE
The annual distribution rate based on current market price at January 31, 1998,
was 5.78%, which is equivalent to a taxable yield of 8.70% based on the maximum
federal tax rate of 39.6%.
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The rates of return will vary and the principal value of an investment will
fluctuate. Shares, if sold, may be worth more or less than their original cost.
Past performance is not indicative of future investment results.
*These rates of return reflect changes in market price or net asset value, as
applicable, and assume that all distributions within the period are invested
in additional shares.
**Returns for periods of less than one year are not annualized.
+ Preferred Stockholders were paid dividends at annual rates ranging from 3.40%
to 5.15%. Earnings on the Fund's assets in excess of the preferred dividend
requirements constituted dividend income for Common Stockholders. A portion
of dividends paid to Common Stockholders is taxable as ordinary income.
++Represents the per share amount of net unrealized appreciation of portfolio
securities as of January 31, 1998.
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS (unaudited) January 31, 1998
FACE RATINGS
STATE AMOUNT MUNICIPAL BONDS MOODY'S/S&P MARKET VALUE
<S> <C> <C> <C> <C>
ALASKA-- 2.4% $ 930,000 Alaska Housing Finance Corporation (Collateralized
Mortgage Obligation), 7.05% due 6/1/2025 ............ Aaa/AAA $ 994,151
1,490,000 Alaska Housing Finance Corporation (Collateralized
Veterans' Mortgage Program), 6 1/2% due 6/1/2034 .... Aaa/AAA 1,571,846
CALIFORNIA-- 13.2% 5,000,000 San Francisco City and County Airport Commission
International Airport Rev., 5.80% due 5/1/2021* ..... Aaa/AAA 5,293,000
2,750,000 San Joaquin Hills Transportation Corridor Agency Rev.
(Senior Lien Toll Road), 6 3/4% due 1/1/2032 ........ Aaa/NR 3,125,870
5,000,000 University of California Regents Rev. (Multiple
Purpose Project), 6 3/8% due 9/1/2024 ............... Aaa/AAA 5,589,700
GEORGIA-- 3.0% 3,000,000 Atlanta Airport Facilities Rev., 6 1/4% due 1/1/2021 . *Aaa/AAA 3,210,060
HAWAII-- 1.8% 1,750,000 Hawaii State Airports System Rev., 7% due 7/1/2020 ... *Aaa/AAA 1,915,445
ILLINOIS-- 3.2% 3,000,000 Regional Transportation Authority GOs,
6.70% due 11/1/2011 ................................. Aaa/AAA 3,333,360
KANSAS-- 3.1% 3,000,000 Burlington Pollution Control Rev. (Kansas Gas and
Electric Company Project), 7% due 6/1/2031 .......... Aaa/AAA 3,283,380
LOUISIANA-- 3.2% 970,000 Louisiana Public Facilities Authority Hospital Rev.
(Southern Baptist Hospitals Inc. Project),
8% due 5/15/2012 .................................... NR/AAA 1,197,445
2,000,000 Louisiana Public Facilities Authority Hospital Rev.
(Our Lady of Lourdes Regional Medical Center
Project), 6.45% due 2/1/2022 ........................ Aaa/AAA 2,210,680
MASSACHUSETTS-- 7.2% 4,000,000 Massachusetts Health & Educational Facilities
Authority Rev. (New England Medical Center),
6 5/8% due 7/1/2025 ................................. Aaa/AAA 4,406,160
3,000,000 Massachusetts Housing Finance Agency Rev.
(Residential Development), 6 7/8% due 11/15/2021 .... Aaa/AAA 3,238,890
MONTANA-- 5.5% 2,220,000 Forsyth Pollution Control Rev. (Puget Sound
Power & Light Co.), 7 1/4% due 8/1/2021* ............ Aaa/AAA 2,451,524
1,620,000 Montana State Board of Investments Payroll Tax
Rev. (Workers' Compensation Program),
6 7/8% due 6/1/2020 ................................. Aaa/AAA 1,848,550
845,000 Montana State Board of Investments Payroll Tax
Rev. (Workers' Compensation Program),
6 7/8% due 6/1/2020 ................................. Aaa/AAA 943,510
535,000 Montana State Board of Investments Payroll Tax
Rev. (Workers' Compensation Program),
6 7/8% due 6/1/2020 ................................. Aaa/AAA 610,478
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</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS (unaudited) January 31, 1998
FACE RATINGS
STATE AMOUNT MUNICIPAL BONDS MOODY'S/S&P MARKET VALUE
<S> <C> <C> <C> <C>
NEW YORK-- 18.8% $3,000,000 Metropolitan Transportation Authority Rev.
(Commuter Facilities), 6.10% due 7/1/2026 ........ Aaa/AAA $ 3,320,850
2,000,000 Metropolitan Transportation Authority Rev.,
(Transit Facilities), 6.10% due 7/1/2026 ......... Aaa/AAA 2,213,900
5,000,000 New York City GOs, 6 1/4% due 4/15/2027 ........... Baa1/BBB+ 5,433,950
5,125,000 New York State Thruway Authority Rev.,
6% due 1/1/2025 .................................. Aaa/AAA 5,576,051
3,000,000 New York State Local Government Assistance
Corporation, 7% due 4/1/2021 ..................... Aaa/AAA 3,320,970
PENNSYLVANIA-- 9.8% 2,500,000 Allegheny County Airport Rev. (Greater Pittsburgh
International Airport), 6.80% due 1/1/2010* ...... Aaa/AAA 2,734,075
2,000,000 Allegheny County Airport Rev. (Greater Pittsburgh
International Airport), 6 5/8% due 1/1/2022* ..... Aaa/AAA 2,190,720
5,000,000 Philadelphia Airport Rev., 6.10% due 6/15/2025* ... Aaa/AAA 5,434,050
SOUTH CAROLINA-- 8.7% 4,000,000 South Carolina Public Service Authority Rev. (Santee
Cooper), 6.10% due 7/1/2027 ...................... Aaa/AAA 4,343,840
4,500,000 South Carolina State Ports Authority Rev., 6 3/4% due
7/1/2021* ........................................ Aaa/AAA 4,890,195
TEXAS-- 1.8% 1,730,000 Texas State Veterans' Housing Assistance GOs,
6.80% due 12/1/2023* ............................. Aa2/AA 1,864,213
VIRGINIA-- 3.6% 3,500,000 Virginia Housing Development Authority (Multi-
Family Housing), 7% due 11/1/2012 ................ Aa1/AA+ 3,754,625
WASHINGTON-- 7.1% 860,000 Douglas County Public Utilities District #1
Hydroelectric Rev., 7.80% due 9/1/2018* .......... A/A+ 940,290
5,000,000 King County Sewer GOs, 6 1/8% due 1/1/2033 ........ Aaa/AAA 5,465,900
1,000,000 Municipality of Metropolitan Seattle Sewer Rev.,
6.60% due 1/1/2032 ............................... Aaa/AAA 1,089,330
WISCONSIN-- 4.0% 4,000,000 Wisconsin Housing & Economic Development
Authority Housing Rev., 6.85% due 11/1/2012 ...... Aaa/AAA 4,243,760
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TOTAL MUNICIPAL BONDS (Cost $92,863,574)-- 96.4% .................................................... 102,040,768
SHORT-TERM HOLDINGS (Cost $2,700,000)-- 2.6% ........................................................ 2,700,000
OTHER ASSETS LESS LIABILITIES-- 1.0% ................................................................ 1,048,424
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NET INVESTMENT ASSETS-- 100.0% ...................................................................... $105,789,192
============
</TABLE>
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* Interest income earned from this security is subject to the federal
alternative minimum tax.
Note: Investments in municipal securities and other short-term holdings maturing
in more than 60 days are valued based upon quotations provided by an independent
pricing service or, in their absence, at fair value determined in accordance
with procedures approved by the Board of Directors. Short-term holdings maturing
in 60 days or less are generally valued at amortized cost.
6
